Right Fiscal Policies Can Help Fight Income Inequality

Reducing government debts and deficits can be done equitably

The poor suffer more during tough economic times

Low-income countries have options to boost incomes, promote fairness

Speaking at a global conference on tax and inequality held in New Delhi, India, senior officials from the IMF said many countries face a double challenge: to ensure fiscal sustainability and reduce inequality.

“These two goals are not inconsistent, although they may end up being so if fiscal adjustment is not carefully planned and the wrong instruments are used,” said Carlo Cottarelli, head of the IMF’s Fiscal Affairs department.

Governments around the world face a dilemma—how to reduce debts and deficits and support development, growth, and employment as anxious financial markets rattle the global economic recovery.

The IMF has focused on issues of inequality and poverty for many years, and the issues are once again front and center as countries struggle to recover from the global economic crisis.

“We see concerns about the link between taxation and social justice almost everywhere we look,” Min Zhu, a Deputy Managing Director at the IMF, told the assembled conference delegates from over 80 countries. “We see them in the Occupy movement; in the Arab spring; in the debates on the expiration or not of the Bush tax cuts in the U.S., on how to distribute the pain of fiscal consolidation in Europe; and in the needs of many lower income countries to overcome resistance from elites to establish tax systems with the legitimacy and revenue productivity needed for their sustainable development.”

Poor suffer more

Ensuring economic stability is critical as the poor suffer more than the rich during times of economic crises. High rates of inflation typically hurt the poor disproportionately, as inflation erodes their real incomes, the IMF said.

Also, the poor lack the extra reserves of funds for a rainy day, which would allow them to spend in tough economic times. And periods of economic instability are typically accompanied by rising unemployment and long-term unemployment that exerts downward pressure on the real incomes of poor and low skilled households.

The right kind of fiscal tools

Countries should ensure that the tools to reduce government debts and deficits will promote equitable income distribution.

“Fiscal consolidation will be painful in many countries, but it does not have to be...